Salvaging defective Deeds of Variation

 In Trusts, Wills

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Salvaging defective deeds of variationFor the exercise of a power by trustees (or other donees) to be valid, what is required is not an intention to exercise the specific power, but rather an intention to achieve the desired outcome.  This obscure principle of equity can have important practical applications.  This article examines how in practice it can be applied to give effect to prima facie defective deeds of variation.

The requirement

To be effective, a deed of variation must be executed by all of those beneficiaries whose interests under the will are adversely affected by the variation.  In practice, it is common for those benefiting by the variation and the personal representatives to join in executing the deed too.  But the only necessary parties are those whose existing interests are diminished in some way.  (There is one exception.  This applies where the variation would increase the estate’s liability to IHT.  In such a case the personal representatives must be parties too, but they can only decline to join in the variation if insufficient assets are held by them in their capacity as personal representatives to discharge the additional tax liability.)

This fundamental requirement – that all those adversely affected must be parties to the deed – is sometimes overlooked.  In my experience, this is particularly common where the will contains trusts with minor or unborn beneficiaries.  A deed which seeks to vary those interests without those adversely affected being parties will fail.  For tax purposes there would be no reading back:  IHTA 1984 s 142(1) and TCGA 1992 s 62(6) both require the variation to be ‘by an instrument in writing made by the persons or any of the persons who benefit or would benefit under the dispositions’.  More fundamentally, the disposition would normally not be effective at all.  It is important to keep in mind that, no matter what language might be used in the deed, in the real world it is not possible to ‘vary’ someone’s will;  rather, the substance of the disposition is always a lifetime gift by the person disposing of his interest under the will to the person to whom that interest is redirected.  So it is necessary for there to be a valid gift by the donor to the donee.  If the disposition is effected by a deed, it is obvious that all of the donors must join in executing the deed.

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Where the variation redirects the interests of a minor under the deceased’s will or intestacy, the arrangement must first be approved by the Court.  The Court can give such approval under the Variation of Trusts Act 1958 where the arrangement is in the interests of the minor or unborn beneficiaries.  If such a variation has not first been approved by the Court, it cannot take effect and HMRC will rightly not accept that a valid variation has taken place.

An example

Edwin died in November 2008.  He was survived by his wife, Florence, and by their two adult sons, Greg and Harry.  Edwin’s will provided for a nil-rate band discretionary trust, in a standard form with powers of appointment and advancement capable of being exercised for the benefit of a class of beneficial objects which included Florence, Greg, Harry and Edwin’s remoter issue.  The trustees were Florence and Greg.  After Edwin’s death, the family were told by the solicitors acting in the administration of the estate that the discretionary trust served no useful purpose, given the availability of the transferable nil-rate band on Florence’s death;  the solicitors suggested that the simplest course of action would be to execute a deed of variation.  So Florence, Greg and Harry executed by a deed by which they purported to vary the dispositions effected by Edwin’s will by deleting the discretionary trust.  On Florence’s death, her executors claim the full transferable nil-rate band.  HMRC rejects the claim on the basis that the deed of variation was ineffective.

Intention to exercise the trust powers

The deed certainly could not have effected a variation as the class of beneficiaries included unborn beneficiaries and there had been no VTA application.  But, perhaps surprisingly, there is a good argument that the deed is nonetheless effective as a valid exercise of the trustees’ powers of appointment or advancement.  This is so even though the deed will not have mentioned either of those powers and perhaps even if Florence and Greg were unaware of the existence of the power of appointment.  This is because, in determining whether a power has been exercised, the relevant question is not whether the trustees intended to exercise the specific power, but rather whether they intended to achieve the relevant result – which in this example was to terminate the trust and to pay the whole fund out to Florence absolutely.

There are many authorities in which this principle[1] has been applied.  One, which contains a particularly clear statement of the principle, is Re Morgan (1857) 7 IR Ch R 18 (a decision of the Irish Privy Council) at 50 per Monahan CJ:

‘The question which we have to consider is – what is the true rule of law as to the construction of instruments executing a power? I deny altogether that it is necessary to deduce from the instrument an intention that the power should be executed. All that is necessary is, to deduce from the instrument an intention to do the act, which act can only be done by an execution of the power; and that when we once come to the conclusion that the intention is clear to do the act, and that the act cannot be done except by executing the power, and cannot be done by means of any estate which the party possessed, the law will consider such act an execution of the power.’

See also this statement of the principle by Kekewick J in Mogridge v. Clapp [1892] 3 Ch 382:

‘How do we, as lawyers, consider whether a person intends to exercise a power?  I think it is a good idea first to ascertain whether, undoubtedly, the person intended the effect to follow.  […] There is an old rule, which I think is applicable to this case, that where you find an intention to effect a particular object, and there is nothing to exclude the intention to effect it by a power which is available, and there are no means of effecting it except by that power, then you conclude that the intention was to effect it by means of that power, because otherwise it would not be effected at all.’

Application to the defective deed of variation

This principle can be applied to the deed of variation of Edwin’s will.  There is no doubt about the object that the parties (which included both trustees) were intending to achieve – this was to terminate the trust and for the whole estate to pass to Florence absolutely.  The reason the trustees executed the deed was to give effect to that intention.  The trustees in fact had the power to achieve their desired objective, by exercising either the power of appointment or the power of advancement.  As commonly drafted, no formalities would be required for an exercise of the power of advancement;  the power of appointment would almost always need to be executed by deed – and that requirement was satisfied here (it does not matter that it was additionally executed by Harry, who was not a trustee).

So the deed would, on this argument, have taken effect as intended.  The whole of the fund was appointed to Florence at the date of the deed.  For IHT purposes, although the requirements of IHTA 1984, s 142 are not met, the appointment is nonetheless read back pursuant to s 144.  So the full transferable nil-rate band would be available on Florence’s death.  (The only difference is that there is no reading back for CGT purposes, as TCGA 1992, s 62(6) does not apply and there is no CGT equivalent of IHTA 1984, s 144.)

HMRC has accepted in correspondence that this principle can apply in the way described in this article.  This was in a case where this meant that the full transferable nil-rate band was available on the surviving spouse’s death.  But there are counterarguments and potential limits to the application of this principle.  See, for example, the decision of Mervyn Davies J in Turner v. Turner [1984] Ch 100, where the trustees of a discretionary trust had simply signed all of the trust documents put before them by their solicitors.   Mervyn Davies J decided that in those circumstances the purported exercises of the powers of appointment were ‘wholly void’.

Conclusion

The principle in Mogridge v. Clapp is a very useful one for practitioners (and their insurers) to keep in mind.  It is of wide application;  its use in the context of deeds of variation is just one example.  Another might be where trustees purport to exercise a power to remove (when that power is unavailable or does not exist) but the same result could be achieved using a power of appointment.  One would want to consider the potential application of this principle in any case where a purported exercise of a power appears to be void, but where the trustees would have had the ability to achieve the desired result by an alternative route.



[1] For a detailed review of the relevant authorities see ‘An Ameliorating Principle of Equity – but not in New Zealand’ by Francis Barlow QC in Trusts & Trustees (2011) Vol 17, issue 2, pp 81-93, which examines the Supreme Court of New Zealand’s failure to apply this principle in Kain v Hutton  [2008] NZSC 61;[2008] WTLR 1381.

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